Unemployment has been a principal preoccupation of critical economists, policymakers, and ordinary citizens in twentieth-century America. This volume combines economic theory and economic history to provide some provocative insights into how a “modern” approach to unemployment evolved, and why, in the authors’ judgment, it ultimately failed.

The authors raise important issues: What has determined the volume of unemployment in America? Can the “macro” issues of full employment and output determination be explained in terms of a “micro” analysis of leading markets, particularly that for labor? Have revolutionary twentieth-century changes in economic thinking regarding unemployment policies served to befriend or harm...

Of the five centuries during which the United States has been settled by Europeans, in only one, the twentieth century, has unemployment been a dominant political and economic issue. Whereas in nineteenth-century America passions erupted over inflation and deflation, tariffs and taxes, slavery, the disposition of public lands, central banking, and the regulation of monopolies, public debate about the “unemployment problem” was sporadic and localized. Indeed, the word “unemployment” did not even exist during most of the century, and when Alfred Marshall wrote the definitive nineteenth-century treatise on economics in 1890, he mentioned the word on but one page.¹

By...

With the increased interest in unemployment came intense scholarly investigation into its causes. Whereas in the nineteenth century economists were concerned about the gains from trade, the determination of prices and quantities, and optimal production levels for firms in alternative market structures, over much of the twentieth century the dominant single interest in economics was the question of the determinants of unemployment. Indeed, a whole new branch of economics, “macroeconomics,” developed.

Economists since John Maynard Keynes (who died in 1946) generally accept Keynes’s interpretation of what he termed the “classical” economists’ position on unemployment.¹ Actually, the use of the term...

In the previous chapter, it was suggested that neoclassical and Austrian economists essentially believed that unemployment varies directly with what was termed “the adjusted real wage.” Increases in the adjusted real wage, other things equal, price some labor out of a job, increasing unemployment. It was further suggested that changes in any of the components of the adjusted real wage could change unemployment. Specifically, unemployment grows with increased money wages, but decreases with increased prices or productivity growth. We now proceed to examine the general validity of this neoclassical/Austrian perspective, and then comment on some general criticisms of the approach....

In many respects, the first three decades of the twentieth century were the golden age of the American economy. Despite the absence of national income statistics, it became very apparent during this period that America was the world’s premier economic power. The economic performance of the nation from 1900 to 1929 clearly established that this was “the American century” as far as economic growth was concerned.

Not only did real output expand at a very respectable 3.4 percent annual rate, but the growth far outdistanced that of older economies in Europe. It has been estimated that real output rose only...

The four years from 1929 to 1933 were a watershed in the economic history of the United States. The old order that had existed in some sense from the beginning of the republic began to crumble, and a peaceful but real revolution overtook the polity, bringing with it a dramatic change in the role of the state in American life.

The peaceful revolution that led to the New Deal in 1933 was the lasting consequence of the greatest economic downturn the nation ever witnessed. Hence it is essential to examine the Great Depression from the perspective of unemployment and the...

The initial determinant of the labor-market disequilibrium that produced the unprecedented unemployment of the Great Depression was the high-wage, underconsumptionist policy followed by the Hoover administration, which manifested itself in jawboning and tariff increases that kept wages remarkably high into 1931. Yet money wages did finally begin to fall considerably, and by 1931 Hoover and his policy were increasingly viewed with disdain. To the extent that high wages were maintained by “moral suasion,” that tactic was increasingly ineffective as the Depression worsened. Despite the inability to maintain wages after 1931, the fall in money wages was inadequate to return the...

“The only thing there is to fear, is fear itself!” So said Franklin D. Roosevelt on his inauguration as president of the United States on March 4, 1933. Roosevelt’s charisma, his vigor, the activist policies he pursued—all contributed to a decline in fear and the beginning of an economic recovery. The change in the direction of economic activity had an enormously positive psychological impact that probably contributed to the economic recovery that followed. This was certainly a not inconsiderable achievement.

While Roosevelt may have helped initiate recovery, there is overwhelming evidence that newly instituted policies of his administration served...

If the thirties were years of unequaled high unemployment, the forties were almost precisely the opposite. Unemployment fell to levels that compared favorably with the Gilded Age of a generation earlier. For the only time in American history, before or since, the nation had three consecutive years with an unemployment rate below 2 percent, and six consecutive years with a rate below 4 percent. This was all the more remarkable because the decade began with the Great Depression still very much present, with unemployment around 15 percent. It was not until mid-1941 that it returned to the single digits.¹ Table...

Subsequent to the unexpectedly easy transition from war to peace that followed the cessation of hostilities in World War II, there were three relatively brief perturbations in a sustained period of fairly high levels of economic growth and low levels of unemployment. In 1949, unemployment rose from 3.8 to 5.9 percent but fell back the next year to 5.3 percent and continued to decline to a post-World War II low of 2.9 percent in 1953. After an increase to 5.5 percent in 1954, it hovered in the low 4 percent range for the next three years and then surged to...

By historical standards, things were going swimmingly. On a decade-by-decade basis, the 1950s shows one of the best records in terms of unemployment in this century. However, recall our earlier comments about the psychology of unemployment. If you are accustomed to and expect 10 percent unemployment, 5 percent seems a delight. But once you become accustomed to 5 percent, it is no longer so desirable. You begin to yearn for 4 percent, or 3 percent, or ultimately none. Besides, the Great Depression was fading in memory. No longer would its average unemployment of over 18 percent serve as a yardstick...

There is often a peculiar irony in human affairs. Just as it seems that we have acquired mastery over our fate, we find that we have miscalculated. The 1960s was the decade in which the business cycle was to be dispatched ceremonially to the realm of historical curiosity. With our present knowledge, we know that this was not to be. However, that is an account of events that has the benefit of hindsight. After the fact, it may be clear why the great promises of the 1960s were not to be realized. At the time, though, things seemed otherwise to...

As the decade of the eighties began, there was controversy and debate about the nature of the macroeconomic world. Among academic economists, new ideas had been surfacing throughout the seventies, especially the rational-expectations notions of Robert Lucas, Thomas Sargent, Robert Barro, and others.¹ Their basic premise, that participants in market processes accurately anticipate future market developments, especially price movements, put expectations at the forefront of economic analysis. Within the context of the macroeconomic conditions of the 1970s, it provided a much more appealing explanation for events than the negatively sloped Phillips curve of the sixties. It can be argued that...

Like most accounts of economic change, this book has emphasized short-run movements in economic variables, in this case unemployment. Yet in our concern for explaining variations in the amount of joblessness from one year to the next, we risk the possibility of ignoring longer-term shifts in the magnitude of unemployment. There has, in fact, been a fairly considerable variation in “typical” or “normal” rates of unemployment over the twentieth century. In this chapter, we return to a longer time horizon to attempt to suggest reasons for these changes. Our conclusions are, frankly, rather more speculative than those developed earlier, but...

The considerable variations in the aggregate magnitudes of unemployment over time and space and according to time horizon (long versus short run) disguise important demographic, racial, and gender differences in unemployment. In many recent years, teenage unemployment rates have been triple the overall unemployment rate, and at times there have been more modest, but noticeable, differences in unemployment by gender. Far and away the most interesting and potentially divisive differential, however, is that with respect to race.

Many writers have studied these differences intensively. In a general survey of a century of unemployment, we cannot hope to explore them in...

When reaching the conclusion of a book, one searches for broad themes, for a grand statement of the central thesis of the work. In this instance, the fundamental thrust of our effort may not have been totally obvious, having been somewhat submerged in the masses of statistical and theoretical discussion that have been a necessary feature of our argument. Basically, what we have been examining is the role that the state has to play in determining the level of unemployment in a free society. To provide a focus for dealing with that question, let us review the range of alternative...

Two-thirds of the way through the 1990s, it appears that this century’s last decade rates fairly poorly in terms of its unemployment experience, continuing the generally high unemployment rates observed in the era since 1970. To be sure, the average unemployment rate was lower than in the 1980s. Yet, even in good years unemployment has been high by historical standards. For example, 1996 is the twenty-third consecutive year in which the annual unemployment rate exceeded 5 percent, a rate above the typical (median) rate in six of the century’s decades. The best years in the 1990s (as in the 1970s...